"Limited Consumer Recovery in China in Second Half... Preference for Hong Kong Stock Market Maintained"

On July 24, LS Securities stated that although the Chinese stock market has recently maintained strong momentum, the recovery in consumer spending in the second half of the year may be limited. Therefore, the company prefers the Hong Kong stock market, which is centered on technology stocks, over the Shanghai Composite Index.

Baek Gwanyeol, a researcher at LS Securities, presented this analysis in a report titled "Review of the Chinese Stock Market: Expectations Remain Valid, but the Key Driver Is the Slope of Economic Recovery" released on the same day. He noted, "The conditions for a rerating of the Chinese stock market have become more stringent compared to the past."

First, Baek pointed out that "despite being identified as the country most affected by U.S. tariff policies, the Chinese stock market has shown strength in line with global markets." As of the previous day, the Shanghai Composite Index reached a new yearly high, briefly surpassing the 3,600 mark during trading. The Hong Kong stock market also hit its highest point of the year, recording a higher annual return than during the deep correction in February.

Baek cited the following factors as the background for the strength of the Chinese stock market: expectations for easing U.S.-China tensions, expectations for improved corporate earnings, and expectations for additional economic stimulus. He explained, "With the third U.S.-China trade talks confirmed for July 28-29 in Stockholm, Sweden, there is growing anticipation that the grace period ending on August 12 could be extended." He added, "The fact that China's rare earth exports, which had been used as a bargaining chip in negotiations with the U.S., surged significantly in June suggests that smooth U.S.-China agreements may be possible going forward."

He also noted, "The most prominent issue in China's financial markets right now is the keyword emphasized by the Central Financial and Economic Affairs Commission in early July: 'blocking vicious low-price competition.'" He continued, "Just as during the supply-side reforms of 2015-2016, there are expectations that corporate earnings could improve, which is supporting the bullish sentiment in the stock market." He added, "Despite the government's strong stimulus measures, the low ratio of retail sales to gross domestic product (GDP) and the delayed recovery of the housing market are prompting calls for additional measures, which could sustain strong policy momentum in the second half of the year and support the market's lower bound."

However, while Baek acknowledged that these three expectations are positive for the Chinese stock market, he emphasized, "At the current valuation level, the key driver is the slope of economic recovery." He cautioned, "While continued optimism may limit downside risk in the market, the very gradual pace of economic recovery makes it difficult to achieve sustained rerating."

Accordingly, he concluded, "We believe that a meaningful recovery in consumption and the real estate market will remain limited in the second half of the year. Therefore, we maintain our preference for the Hong Kong stock market, which is focused on technology stocks with clear profit trajectories, over the Shanghai Composite Index, which is more sensitive to economic cycles."